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iSuppli: Semi recovery a 'false spring'

2010 revenues to barely exceed 2007

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A consensus is evolving that the semiconductor industry is going to recover mightily in 2010. But the analysts at iSuppli want to remind everyone that things are only going to feel so good this year because they were so bad in late 2008 and through 2009.

The latest estimates for global semi sales for this year from iSuppli suggest a dramatic recovery, with chip sales of $279.7bn, up 21.5 per cent from the $230m level set in 2009.

"Amid double-digit growth in revenue, rising prices, supply constraints and soaring capital equipment purchases, enthusiasm over the semiconductor industry’s 2010 outlook has hit a fever pitch," explained Dale Ford, senior vice president of market intelligence services at iSuppli in a statement accompanying the projections. "However, conditions in 2010 appear so fantastic only in comparison of 2009. In reality, 2010 is likely to simply be a year when semiconductor industry growth on a sequential quarterly basis returns to a more normal pattern."

The expected bounce in 2010 is no doubt better than the alternative. But, just to keep everyone grounded, iSuppli stressed that the levels in 2010 will only be 2.3 per cent higher than the $273.4bn set in 2007. The recession in the United States started that December and spread throughout 2008 as the financial crisis kicked in. The levels set in 2010 will only be 8 per cent higher than the $258.9bn level of semiconductor sales in 2008. It will be a long time before the industry gets back the money it was not able to make in 2008 and 2009.

To drive home the message that this rebound is a false spring of sorts, Ford reminded everyone that the crash of 2009 was the first time in the history of the semiconductor industry that a downturn was instigated primarily from economic conditions. The big fall in 2001, said Ford, was the result of the dot-com bust and excess semiconductor manufacturing capacity coming online during the dot-com boom. In general, he added, the ups and downs of the semi market have been driven more by technology issues than economic ones.

The question now is how tightly the rising and falling of the semiconductor market is bound to the general global and regional economic conditions. One expects that 2009, which makes a break with historical trends, is setting a new one: As the economy goes, so goes semis.

While revenue is great, what investors want to see is profits. The real concern is whether the semiconductor industry will be any more profitable in 2010 than it was in 2007, despite our increasing appetite electronic devices crammed with chips. According to iSuppli, mobile phone makers are saying that supplies of chips used in their devices are currently constrained, and chip makers are trying to raise prices and therefore margins.

But despite that, iSuppli's procurement pricing index says that the average price of semiconductor components will fall by 2 per cent in the first and second quarter - what it says is a typical price decline for the industry and not reflective of a "surge in pricing". And that means competition is high and profits will continue to be under pressure.

If capital spending is any gauge, then the semiconductor industry still has a way to go to a full recovery. iSuppli says that chip makers will spend 46.8 per cent more on wafer baking equipment in 2010 than they did last year, but even with that the capital spending will be less than half the levels set by the industry in 2007 and 2008. Chip makers are focused on moving to new technologies right now, not building out capacity for existing technologies. ®